Intel Earnings Beat Estimates Thanks to Data Center and IoT Growth

By Peter Bernstein July 16, 2015

Way back in 1971 the Monty Python comedy group put out an anthology film based on their then hit TV series Monty Python’s Flying Circus called, “And Now For Something Completely Different.”  Dominant global chip manufacturer Intel came out with its second quarter earnings, and while they may not be completely different from past reports they do highlight the changing nature of their business and the technology industry in general.  As someone once told me, “if you want to really know about the economy in general track the cardboard box industry because everything comes in a cardboard box, and if you want a good read on what is happening in tech follow the chip manufacturers.”  

Intel beat financial analysts’ lowered earnings expectations. For FY2Q 2015 net income was $2.7 billion, or 55 cents a share. Compared to the same quarter last year this was down $100 million. However, as financial analysts noted, this was the same in per-share terms because Intel has bought back a lot of its stock. Net income was also lifted by a lower tax rate. Revenue fell 5 percent, to $13.2 billion.

Global economic instability and the major sea-changes impacting all technology suppliers were the reasons the consensus view of earnings were that they would be off after 2014. Intel surpassed the gloomy outlook which according to a survey of analysts by Thomson Reuters were 50 cents a share on revenue of $13.04 billion.

Intel also did something that I happen to appreciate. It provided a visualization of its earnings along with the standard press release, and I trust readers find this a nice way to digest such news.

Source: Intel  

The quote in the above graphic from Intel CEO, Brian Krzanich, sums thing up nicely.  As everyone in tech knows, Intel rose to dominance thanks to the PC explosion. Much of the company’s revenues come from the PC market; however, as people are using more mobile devices for computing 2Q, revenue from chips for PCs fell 14 percent. In addition to the quarterly dip, Intel is forecasting that, for the year, slippage would be in the high single digits. 

Even if you only follow Intel casually, the fact that it has been ramping up investments as it transitions from a hardware company to a services company that uses hardware as its platform—in the expanding Cloud, data center and Internet of Things (IoT) spaces—is certainly no secret. And, again as the quote notes those investments are paying off. Data center chips sales rose 10 percent over last year, and as the quote says those aggregated data center, IoT and high-level memory chip sales were 40 percent of revenue and an impressive 70 percent of profits.

Krzanich, in further comments on the results, said: “Second-quarter results demonstrate the transformation of our business … We continue to be confident in our growth strategy and are focused on innovation and execution.”

Image via Shutterstock

“Transformation” really is the best term to describe the adjustments Intel, and others, are making. The entire Information and Communications Technology (ICT) world continues to be buffeted by the forces of changing user demands and accelerating innovative/disruptive technologies and business models. 

One example of how things are changing even in the basic PC business is that Intel used to get a boost in sales every time Microsoft released a new version of Widows as customers wanted new and faster hardware to run what many called “bulkware.” However, PC replacement cycles are getting longer, as so much of what PCs crunched is now done in the cloud, including Windows. Hence, the trend of diminished PC chip sales is not a short-term glitch. 

Intel’s results are not completely different, but they certainly are different. And, as with cardboard boxes, you can ascertain a lot about business conditions by trend spotting. Intel is making sure the data center and IoT technology trends are critical parts of its future success and the proof is already in the numbers. 

Edited by Dominick Sorrentino
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